One after the other our political leaders, backed by a nodding chorus of plastic-helmeted steel or car industry executives, look meaningfully into the camera and pledge to preserve Australia as a country that can still “make things".

You and I, as we watch the evening news, are supposed to conclude that manufacturing is on the edge of extinction, and that Australia is in danger of becoming an economy of investment banks and milk bars.

But, like so much of the news manufactured by government spin doctors, it is a con trick.

Australian manufacturers are producing one and a half times the output they produced in the 1970s, and they are doing it with less government assistance.

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Moreover, Australian manufacturing is not made up of the generously assisted car, metal and fabricated products and textile, clothing and footwear (TCF) industries. In fact those industries account for only about 20 per cent of manufacturing’s contribution to the nation’s economic output, and about 24 per cent of manufacturing employment.

The motor vehicle and component manufacturers, which get most of the headlines and the highest effective rate of assistance (equal to almost 9 per cent of their underlying contribution to economic output), account for less than 6 per cent of manufacturing production and less than 9 per cent of manufacturing employment.

Getting on with business

So what is rest of manufacturing doing? Well, it is busy getting on with its business out of the glare of television lights, and is doing so with less than half the assistance lavished on the car industry.

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The Productivity Commission’s latest annual Trade and Assistance report shows that the average effective rate of assistance for manufacturing as a whole is just 4 per cent, with the rates of assistance for food manufacturers, the chemical industry, and machinery and equipment manufacturers averaging only about 3 per cent.

Government assistance for the motor vehicle and parts manufacturers totalled $1.1 billion in 2011-12. Metal and fabricated products manufacturers got $1.6 billion in tariff protection and subsidies, and the TCF industries got $300 million. That’s about $10,000 per employee.

Of course it is true that manufacturing’s share of the nation’s real economic output has shrunk. In fact it has more than halved, from 15 per cent to 7 per cent, since the middle of 1970s.

But that’s not because manufacturing output has fallen. It is because the other sectors of the economy have expanded more quickly. Unemployment has fallen, with the main growth in jobs being in the services sector, while real incomes have risen strongly.

What catastophe needs averting?

So, what catastrophe do our politicians claim to be averting?

They may be averting a catastrophe for the chronically unsuccessful industries. But, as is perfectly clear, the Australian economy is more than able to create jobs to replace those in declining industries. The politicians, while pretending to protect the national interest, are in fact serving the sectional interests of the failing industries. Indeed they are acting against the national interest.

As the commission’s report shows, the service sector, which accounts for 80 per cent of gross domestic product and 85 per cent of employment, is effectively taxed as a result of the assistance lavished on the politicians’ favourite manufacturers.

It is estimated that the construction industry is forced to pay out an extra $1.4 billion a year in inflated prices for its inputs, thanks to the tariff protection granted to the manufacturers. Construction is by far the biggest loser in dollar terms, but the accommodation and food services industry, the retailers and wholesalers, education and healthcare also are penalised.

However, the long-term damage to the economy is greater than the basic numbers would suggest.

In a fully-employed economy, the expansion of one sector of the economy must be at the expense of the others. So when governments prevent unsuccessful industries from contracting, they also limit the ability of other, more successful industries to grow.

The growth of the resources sector has put upward pressure on wages, the cost of manufacturing inputs and the Australian dollar.

The federal government has increased assistance to the car industry and the other economically inefficient manufacturers to limit the contraction of their production and employment.

As a result, the dollar, wages and other costs are higher than they otherwise would have been. That hasn’t stopped the miners from expanding, but it has been at the cost of industries that are more economically efficient than the heavily assisted minority of manufacturers.

Likely casualties

The casualties are likely to include innovative but highly vulnerable hatchlings in the manufacturing, service and mining sectors.

These losses are never noticed by the politicians, who care only about the factories and jobs they can see.

But we should know from experience that the long-term economic cost of suppressing entrepreneurial activity is very high.

The new rush to build an invisible wall of anti-dumping protection for Australian manufacturers will, in due course, prove that point yet again.

For anyone willing to look beyond the immediate problems of the rust belt industries it is possible to see how the damage will occur.

Asia’s emerging new middle class won’t need Australian cars and steel. The world will be awash with cars and steel, and all the other commodified manufactured goods made in their own countries.

What they will want from Australia is its minerals and energy, its high-quality food, its niche manufacturing, and high-end services ranging from tourism to healthcare, to architecture and the other knowledge-intensive professional services.

But we will have to be incredibly innovative and fast on our feet, because we have no special, natural advantage over our competitors when it comes to services.

And yet, that is the very activity our politicians now ignore and tax in their determination to prop up the rust belt.